Cross-border Regulatory Challenges

In November 2011, the Austrian central bank and the Austrian Financial Market Authority announced that subsidiaries of the three largest Austrian banks (Erste Group Bank, Raiffeisen Bank International and UniCredit Bank Austria) have to ensure that the loans to local stable funding ratio (LLSFR) of new loans to local refinancing does not exceed 110 per cent.

Convergence toward a much healthier funding structure is clearly a highly desirable target.

The LLSFR will affect lending in countries where the loan-to-deposit (L/D) ratio is already high (for example Ukraine, the Baltics, Serbia). In countries that are characterized by huge funding gaps a stronger focus will be placed on funding strategies, with the most successful ones helping banks diversify properly between stable funding sources. On the back of that, the role of domestic funding resources (especially deposits) will continue to increase in importance. Similarly, the increased use of supranational funding will help banks achieve a greater diversification of funding. In this respect there is also some risk that a few smaller CEE countries could be affected more strongly, especially if their home-country supervisors start implementing their own regulations as well.

The role of non-bank financial intermediaries

Local capital markets remain a fairly shallow source of financing in the region (see Figure 15.8). Only a number of countries have been able to actively develop their markets, with the size of the bond market exceeding the level of 25 per cent as a share of GDP (as in the case of Turkey, Poland, Hungary and the Czech Republic, as well as Slovakia and Slovenia). In a similar vein the local equity markets are also small, with only Poland, Russia, Turkey, Croatia and the Czech Republic exceeding the 15 per cent of GDP mark. From this perspective the role of non-bank financial intermediaries remains in the developing stage in most countries of the region, and both the crisis and recent pressures on liquidity and funding make any substantial development quite unlikely in the foreseeable future.

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